It was during a visit to London?s Royal Exchange in 1844 that Elizur Wright, the nation?s first insurance commissioner, witnessed the practice of selling existing life insurance. Concerned by the absence of any regulation of these sales, Wright introduced legislation requiring U.S. insurers to repurchase the policies they issued. He also introduced a formula that defined how much insurers would pay ? an amount that came to be known as cash value.

While Wright?s reforms were intended to protect the consumer?s equity in their life insurance should they ultimately choose to forfeit the policy, the reforms had another less favorable outcome. They created a monopsony. As a result, policyowners wishing to exit a policy have had only one buyer ? the issuing life insurer. The only way to break the monopsony was to give consumers access to buyers who were willing to pay more than cash value.

The viatical and life settlement industry came into the mainstream in the late 1980s. At that time it focused primarily on viatical settlements, which enable people who are seriously ill to sell their life insurance policies for an immediate cash settlement. Soon, life settlements became another option; these enable seniors to sell their life insurance policies for estate and financial planning purposes, rather than for reasons of ill health. The vast majority of the industry is now focused on these high-net-worth transactions, life settlements, rather than on viatical settlements.

In the mid 1990s the life settlement market began to emerge as an alternative investment class. Investors, seeking higher interest alternatives to intermediate bonds, have deployed billions into what has become a liquid, life settlements market. Life settlements cater to individuals over age 65 with considerably larger life insurance policies that have been in force for a minimum of two years and with a life expectancy between 3 ? 12 years.

A policy?s worth can now be defined in terms of what buyers would offer in a competitive marketplace. The secondary market provides a free market environment that offers an independent appraisal of the policy. This vibrant secondary market has also caused affluent seniors to realize that they have an untapped asset, their unused excess insurability. To finance the creation of the asset, a two-year non-recourse premium financing loan is secured by these individuals to pay the premiums until the newly issued policy can be sold on the secondary market. A recent evolution of this concept is for the program to make a discounted cash advance of 2% -3% of face amount up front to the insured with the lender receiving the policy as payment in kind at loan maturity. The policy is then sold by the lender on the secondary market for profit.